What Is Straight-Through Processing (STP)?
Straight-through processing is an automated process done purely through electronic transfers with no manual intervention involved. Its popular uses are in payment processing as well as the processing of securities trades. Any company involved with straight-through processing will need to have the necessary systems and technical networking in place to facilitate STP efficiency.
- Straight-through processing is an automated process done purely through electronic transfers with no manual intervention involved.
- Generally, straight-through processing is most well-known in the areas of payments and securities trading, though it can be implemented in a variety of technical scenarios.
- Computers, mainframes, electronic exchanges, and the internet are all improving the opportunities for STP processing.
Generally, straight-through processing is most well-known in the areas of payments and securities trading. However, in general it is a methodology that could be implemented in a variety of technical scenarios. In all areas of STP, the technology for STP is constantly evolving. In payments, cryptocurrencies and fintech providers have introduced much faster types of straight-through processing, particularly as alternatives to banks.
Straight-through processing is an innovation that has developed alongside the integration of computers and computer programming. In the early 1970s, Automated Clearing Houses (ACH networks) began development. The Society for Worldwide Interbank Financial Telecommunication (SWIFT) was also founded around this time. SWIFT and ACH significantly upgraded banking payment transfers from a previous telegraphic system, which involved a single operator typing telegraphic transfer orders through Morse code. ACH was first introduced in the United States by the Federal Reserve Bank of San Francisco, mostly as a solution for payroll direct deposits.
The 1970s brought about the first efforts for STP in bank payments.
Since the 1970s ACH and SWIFT networking has grown, though these two systems form the main framework for most all domestic and global payment transfers. Any financial service provider who wants to be in the payment processing business will need to link up with a payment processing network for facilitating electronic STP.
In general, most all electronic payment processing is considered STP. However, advanced coding within payment networks can be added to flag or stop suspicious transactions for the alerting of security specialists.
ACH and SWIFT were groundbreaking introductions that changed the capabilities for banks and also created a vast array of opportunities for financial technology platforms. STP itself has increased the efficiency and speed of payments domestically and globally. STP streamlines the use of payment and routing information so that the instructions don't need to be manually entered.
How Straight-Through Processing Differs from Traditional Payments
The traditional method of sending money involved multiple departments both on the initiation and receiving end of the transfer that could take days to complete. Payment would first be initiated via the phone or a software program. The payment settlement details would have to be confirmed by a person at both companies via the phone, email, or fax. The settlement details were then manually input into a payment system and later confirmed either by a supervisor to ensure accuracy before releasing the payment. Before ACH and SWIFT, payment transactions were then sent via telegraphic message using a special code. The process could take anywhere between several hours to a few days to even initiate, depending on the details involved.
International payments to emerging economies, for example, must often meet stringent criteria with supporting documents that meet local regulatory requirements and laws before a transfer can be completed. As a result, several people may have been involved both on the initiating and receiving end of the payment as well as employees from any intermediary banks involved. Telegraphic transfers had a higher propensity for errors, delays, and increased costs. Also, the lack of automation caused instability as well as lack of exact processing expectations, which created problems for suppliers and customers trying to make timely business payments.
As you can imagine, STP was a big help for businesses. It could streamline the accounting process for companies, particularly in accounts payable and accounts receivable. It helped in the tracking and collection efficiency of money to and from business partners and customers. It reduced the number of errors involved with accounting functions and improved working capital, cash flow efficiency. It also aided in improved business analytics, since companies can track client behaviors and spending patterns as well as costly delays or errors by the customers or the system.
STP allows businesses to authenticate their customers on the web, sell them a product, initiate a payment, and set delivery of the product, all with just a few clicks. E-commerce sellers must have a transaction solution, which may be multi-faceted. E-commerce platforms can partner with brand providers like Visa, Mastercard, American Express, or Discover. They may also partner with a fintech like PayPal. The offering of payment plans and installment credit is also becoming more popular through fintechs like Affirm. Sales efforts can be enhanced since online systems have the potential to offer products and services to a customer automatically through a single point of sale with a multitude of payment choices all done online.
One example of a leading company that has implemented straight-through processing is Amazon.com. The online retailer has remained focused throughout its existence on removing any obstacles to customers purchasing products on its website. Amazon has excelled in making use of automation technology and sophisticated algorithms to serve its customers and drive revenue.
Cryptocurrencies are also an up and coming form of STP for transactions. Cryptocurrencies are electronic transfers that don’t require manual intervention. The greatest benefit of cryptocurrencies is that they remove the need for a holding company intermediary. Crypto funds can be transferred from one person to another directly on a unique network.
Example of How Straight-Through Processing Saves Money
Let's say Bank ABC processes around 200 funds transfers per day and currently does not have a straight-through processing system in place. Through analysis, the bank has calculated that for every 200 payments processed, 20 payments are processed incorrectly or 10% of the payments. The bank is charged $20 for each payment that is not processed properly. The fee is assessed by the receiving bank or correspondent bank since they have to correct the payment instructions or perform manual entries to fix the error.
Here are the numbers:
- 200 payments are processed per day or 4,000 payments per month
- A 10% error rate equates to 20 payments per day or 400 errors per month
- At a $20 fee per error, Bank ABC is charged $400 per day or $8,000 per month
After implementing a STP system, the payment errors decreased to 1% per 200 payments
- At a 1% error rate, only two payments per day or forty payments per month were processed incorrectly
- At a $20 fee per error, Bank ABC reduced the cost of errors to $40 per day or $800 per month
With a STP system, accurate settlement and routing information can be saved in the system avoiding manual entry of payment details and costly errors for the bank and customers.
STP in Securities Trading
In the modern day, nearly all secondary market securities trading involves electronic processing. There can be some human intervention on the front end in placing trades but for the most part electronic systems do all the work. This is where STP comes in. Any transaction in the secondary market requires a trade settlement process, which is associated with STP. This means millions of STP transactions per day for stocks, bonds, mutual funds, exchange-traded funds, pink sheet trades, etc. All financial service companies have some form of back office staffing responsible for the management of trade settlements done through STP.
The Nasdaq was launched as the first electronic stock exchange.
Like at a bank, electronic trade transactions are monitored by back office employees. Trades may be flagged or stopped due to coded security measures, which then may require the intervention of a human. For the most part, securities trades are completed, including the exchange of an actual certificate, within two days. In 2017, the Securities and Exchange Commission mandated a T+2 settlement for securities trades.
In securities trading, the STP process refers to the full T+2 cycle. With STP the entire process from start to finish can be done electronically without human intervention. STP for securities trading requires the need for securities codes as well as the use of brokerage accounting codes, similar to the coding needed for bank and routing numbers. Electronic systems operate through code identifiers, which facilitate a full electronic processing cycle.
Computers, mainframes, electronic exchanges, and the internet are all improving the opportunities for STP processing and innovation. Technology is also helping to improve the actual processing time of a full STP cycle. Some areas that are benefiting from improved technological advances for STP include underwriting and payrolls.
Creditors have the opportunity to fully automate underwriting using STP. To do this, coding is used to set lending parameters, authentications, and approvals. This can make credit extension nearly instantaneous upon submission of an online application.
Payroll systems also benefit from STP. Electronic time tracking logs allow for an easy flow through of authorization and approval, which can then be followed by direct deposit. In the payrolls business, many fintechs are partnering with businesses to provide workers with options for daily direct deposit payments, which helps solve cash flow challenges.